What is blockchain technology?
Today’s businesses are turning to enterprise blockchain for transparency and security. Organisations are searching for a simple blockchain definition to help them understand this emerging, “distributed ledger” technology. Here’s what savvy companies need to know about what it is, why it matters, and how it works.
Why is blockchain important?
Blockchain is important to security. Here’s why. New blocks (with new information) are always added to the end of the chain. Each addition has its own digital signature or hash that is a series of numbers and letters. Think of a secret math code of sorts. Change an amount or number in the block once it’s been added and these signatures change too.
Hackers would need to correctly change all the information up and down the blockchain to be successful.
This technology also cuts out the middleman to help companies save money – and make more of it. Blockchain allows enterprises to validate and carry out safe transactions more directly. Theoretically, deals get done without lawyers, bankers, brokers, and other middlemen. And they get done in a more interactive way since data changes can be made by anyone in the chain, and then viewed and validated by other participants.
How does blockchain work?
How blockchain works is explained best by understanding the communal aspect. It is based on what’s called distributed ledger technology. Everyone in the peer-to-peer network making up these ledgers can look at the same information in individual blocks.
A transaction that gets recorded on one computer or node is visible to each of the computers in the digital network. Everyone can see the same data. What’s more, they can reject or verify what they see. The information is then communicated to every other block in the chain.
This is what makes the technology very difficult to hack. No one computer controls the data and to change it in one block would mean the entire chain needs to follow suit. Everyone has a copy that is automatically updated; alterations need to be verified by everyone in the network. And with the addition of programmable code (first suggested by Russian-Canadian Vitalik Buterin, co-founder of the Ethereum Network) the technology can be used to create “smart contracts” that can execute agreements when certain conditions are met.
What are the key benefits of blockchain?
The transparent and unalterable nature of blockchain technology lend it to a number of advantages for organisations:
- Transparency: Information in blockchains is viewable by all participants and cannot be altered. This will reduce risk and fraud while creating trust.
- Security: The distributed and encrypted nature of blockchain mean it will be difficult to hack. This shows promise for business and Internet of Things (IoT) security.
- Fewer intermediaries: Blockchain is a true peer-to-peer network that will reduce reliance on some types of third-party intermediaries. This makes processes more efficient and means fewer opportunities for data entry errors as well as fewer transaction fees.
- Traceability: Because blockchain data is unalterable, it’s ideal for tracking and tracing items or provenance through complex supply chains, for example.
- Greater efficiency and ROI: Distributed ledgers will provide quick ROI by helping businesses create leaner, more efficient, and more profitable processes.
- Faster processes: Blockchain can speed up process execution in multi-party scenarios – and allow for faster transactions that aren’t limited by office hours.
- Automation: Blockchain is programmable which makes it possible to automatically trigger actions, events, and payments once conditions are met.
- Data privacy: While information is verified and added to blockchain through a consensus process, the data itself is translated into a series of letters and numbers by a hash code. Participants in the network have no way of translating that information without a key.
What are the four types of blockchain networks?
- Public blockchains: The earliest and most prominent examples of blockchain networks, Bitcoin and Ethereum, are public networks. Anyone can read a public blockchain, send transactions to it, or participate in the consensus process. They are considered to be “permissionless.” Every transaction is public, and users can remain anonymous.
- Semi-private blockchains: Semi-private blockchains are run by a single company that grants access to any user who satisfies pre-established criteria. Although not truly decentralised, this type of “permissioned” blockchain is appealing for business-to-business use cases and government applications.
- Private blockchains: Private blockchains are also controlled by a single organisation. It determines who can read it, submit transactions to it, and participate in the consensus process. Since they are 100% centralised, private blockchains are useful as sandbox environments but not for actual production.
- Consortium: Of the four ways to establish a blockchain network, currently, consortium is the most accepted model for business. In a consortium blockchain, the consensus process is controlled by a pre-selected group – a group of corporations, for example. The right to read the blockchain and submit transactions to it may be public or restricted to participants. Consortium blockchains are considered to be “permissioned” blockchains and are best suited for use in business.
A distributed ledger is a database of transactions that is shared and synchronised across multiple computers and locations – without centralised control. Each party owns an identical copy of the record, which is automatically updated as soon as any additions are made. Blockchain is one type of distributed ledger.
Smart contracts – self-executing agreements based on blockchain technology – automatically trigger actions or payments once conditions are met. In the near future, they will use real-time information, such as asset GPS data, to trigger an event, such as a transfer of ownership and funds.
Blockchain-as-a-service (BaaS) is a cloud-based offering that software vendors provide to organisations that don’t want the complication of building their own blockchain solution. Basically, it’s a type of software-as-a-service, which may help spur blockchain adoption.
While distributed ledger technology is still relatively new, it’s already helping businesses streamline multi-party processes, prove authenticity, reduce costs, and more. And the future of blockchain is bright.
Ready to start testing or using blockchain to solve some of your challenges? There are a number of roads to adoption. You can:
- Join a blockchain consortium.
- Hire talent to build a network or solutions in-house.
- Use blockchain-as-a-service (BaaS).
- Leverage existing blockchain solutions.
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